Tom Goodwin and CIO discuss the increasing role that factor and multi-factor indexes are playing within smart beta index-based strategies.

Smart Beta: Classification & Sample Range

We believe simplicity is key when looking at Smart Beta indexation.

Framework

Factor Exposure Indexes

What is the index objective?

Factor indexes aim to achieve for underlying indexes an efficient & controlled exposure to ‘target factors’ - stock level characteristics that are widely considered as important in explaining a stock’s risk and return.
The FTSE Russell factor indexes use a transparent and rules-based methodology to achieve controlled exposure to the target factor(s) by re-weighting an underlying index towards the target factor(s). Secondary objectives include ease of implementation, efficiency, and flexibility.

Alternatively weighted indexes are designed to address perceived concentration risks in capitalization-weighted indexes or to reduce volatility, e.g., FTSE Global Minimum Variance Index Series. Factor indexes are designed to replicate factor return premia using a transparent and rules-based methodology. There is an overlap between these two categories: alternatively weighted indexes have factor exposures. However, these exposures may not be stable over time and are a by-product of the index design, rather than the index’s primary objective.

Non-capitalization weighted indexes employ alternative methods to select and weight stocks. Methodology is designed to weight companies by economic size, severing the link between price and index weight. Index constituents are weighted using a composite of company fundamentals, e.g., total cash dividends, free cash flow, total sales and the book value of equity.

Romana Raj and Stephane Degroote of FTSE Russell are joined by Matthieu Mouly from Lyxor Asset Management to discuss smart beta and factor indexation and to explore the reasons for the rapid growth in this asset class

Peter Gunthorp, Managing Director, Research & Analytics discusses some of the key features of the FTSE Russell Minimum Variance Index (3:55)

The objective of the index is to reduce overall volatility while maintaining ‘healthy’ diversification. Minimum variance portfolios are not necessarily comprised of low volatility stocks; the volatility reduction stems from the correlations between individual stocks volatilities. Thus a Minimum Variance portfolio could well contain a number of very volatile stocks that offset each other.

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Performance

Latest smart beta & factor index news

According to a recent FTSE Russell survey, UK financial advisors are aware of smart beta index-based strategies and are increasing their use, yet remain somewhat skeptical of their benefits and are looking for a greater understanding.
The 2018 FTSE Russell smart beta advisor survey expanded on the global index provider’s 2015 US advisor smart beta survey with input from 256 full-time, fee-based...

According to a recent FTSE Russell survey, US financial advisors are aware of the existence of smart beta index-based strategies, yet they are still unfamiliar on how smart beta works and are in need of much more education.

Investors’ interest in smart beta has increased significantly in recent years, with a specific focus on factor investing. By some counts, more than 300 factors have now been "discovered". But in a zoo of 300, how can anyone sort through the herd to reach a Noah’s Ark of sustainable species that will generate a complete factor universe of sturdy, long run return premiums? Here, we outline the process at FTSE Russell.

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